The sole proprietorship and one person corporation are quite appealing to first-time entrepreneurs. Both business structures have just one owner. And with just a single final decision-maker, running a business is usually straightforward. 

So does it really matter which one you ultimately choose? The short answer: yes. 

The long and winded answer: if you care about succeeding, the business structure you choose can make or break whatever goals you set out to achieve.

On first glance, both options look nearly identical — apart from their labels. But look closer and you’ll discover different requirements and benefits.

If you’re planning to register as the one (and only) owner of a business, you’ll need to know the pros and cons of a sole proprietorship and one person corporation.

📖In Summary:

• Deciding on the right business structure is essential to your profit potential and long-term success.
• A sole proprietorship is the most simple business structure. However, its unlimited liability and succession issues make it less than ideal for some entrepreneurs.
• A one person corporation is very similar to a sole proprietorship, but with a few more legal and tax perks.
• While both options need local registration, registering a one person corporation will involve a few more requirements.

Factors to consider when choosing a business structure

As a business owner, you’ll need to decide on a structure that best fits your needs. Whichever you choose, there are several factors you need to ponder on, such as:

• Degree of control. With more stakeholders, decision-making will naturally be more complex. Useful in a large corporation when you want to have several checks and balances in place. With a smaller operation, it’s often more efficient when there’s only one or two key decision-makers.
• Ability to attract investors. The scale of a business and how it’s structured are some of the key parameters that investors examine before they commit support. Investors generally prefer that the business is a separate entity from the founder/owner.
• Legal and tax requirements. It can be tough to ensure a business is 100% compliant. Corporations can gain access to better tax rates than small and medium operations that are registered as sole proprietorships. On the flip side, corporations generally need to comply with relatively stricter regulations.

 

Pros and cons of a sole proprietorship

The sole proprietorship is the most basic form of business ownership in the Philippines. In this structure, there’s only one person who acts as the “sole proprietor” of the entire operation.

All assets and liabilities of the business are owned by that one person. However, there’s no dividing line between the business and personal side of things. So in practice, if the business goes bankrupt, creditors can go after the owner’s personal assets to pay off outstanding debts of the business. 

Pros

• Easy and low cost setup. Sole proprietorships are very easy to register. That’s why it’s the most common business structure in the Philippines. Starting a business as a sole proprietor can be done with minimal or no expert assistance. 
• Simpler bookkeeping. Since assets and liabilities of the business and the owner aren’t separated, keeping track of finances is relatively simple. That said, it’s best practice to keep distinct bank accounts still. It’ll help avoid needlessly complicated record keeping and accounting processes.

Cons

• Unlimited liability. As far as the law is concerned, you and the business are one entity. Because of that fact, sole proprietors do not have liability protection. When debts are long overdue, personal assets may be seized in order to settle obligations with creditors. And as a business, having excess liability makes it hard to become sustainable. 
• Potentially higher tax rates. Revenue generated by a sole proprietorship is subject to personal income tax. More importantly, when the business starts earning more than PHP 3 million per year, you’ll likely be paying more in taxes and taking in less profit.
• Succession issues. If the owner of a sole proprietorship passes, the business as a legal entity would also cease to exist.

 

Pros and cons of a one person corporation (OPC)

In an OPC business structure, there’s only one business owner, but there are two legal entities. Upon registering the business, the latter will have its own separate juridical entity. As a result, its assets and liabilities separate from the ones personally owned by the founder/owner.

Additionally, the founder/owner can serve as both the director and president of the company. They can also appoint a nominee and an alternate nominee to take over business operations. This is an important precaution in the unfortunate event that they pass away or become unfit to perform their duties.

Pros

• Good option for new entrepreneurs. If you’re fairly new to business, registering as an OPC may be just what you need since it doesn’t require the participation of multiple stakeholders. It’s essentially a personal corporation.
• Tax perks. An OPC can deduct direct costs from its tax liability. Additionally, it also has the option to deduct 40 percent of its gross income.
• Separate juridical personality from the business owner. An OPC has all the perks of a sole proprietorship, without the disadvantage of having unlimited liability. Creditors cannot demand the business owner’s personal assets if the corporation is unable to fulfill its obligations. 
• Corporations can exist forever. When registering an OPC, the registrant can designate a nominee and an alternate nominee who can temporarily take over the business. When a permanent successor is identified to head the business, there’s no need to register an entirely new corporation.

Cons

• More paperwork. Registering an OPC will entail more requirements compared to a sole proprietorship. The requirements typically include: annual audited financial statements, explanatory report for audit findings and recommendations, and disclosure of all self-dealings between the OPC and the director.
• Limited to certain business types. Certain businesses aren’t allowed to register as a one person corporation. For instance, professionals like doctors, lawyers, and teachers cannot form an OPC. Additionally, banks and other large financial institutions are also prohibited.

 

Find the right business structure with Loft

Choosing the right structure is invaluable in the success of your business. Our team at Loft is ready to assist you through each process, whether registering as a one person corporation or sole proprietorship.

Get in touch with us for a free business consultation — it won’t cost you anything but your time. Contact us via email or give us a call at +63-917-899-1111.